613-A_Useful_Question_to_Help_You_Get_Better_Advice_from_Experts
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00:00:14.640 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:18.080 | skills, insight, and encouragement you need to live a rich and meaningful life now,
00:00:21.920 | while building a plan for financial freedom in 10 years or less. Today on the show, I have one
00:00:26.800 | simple concept to share with you, and it is this. Be careful to look out for what's not said
00:00:38.880 | anytime you are engaging in financial discussions. Be careful for the missing alternative
00:00:47.760 | that you're not knowledgeable enough to ask about. Let me give you an example. Yesterday on the Q&A
00:00:55.440 | show, I had a listener who was asking me whether it was appropriate for a woman in her 60s with a
00:01:01.920 | fairly simple financial life who is living primarily on social security income and a pension
00:01:08.400 | income, but also has a million dollars of assets available. And she's investing that money in
00:01:14.880 | an account where she's paying a financial advisor a 1.7% fee for advice on the account.
00:01:22.800 | And the question that my listener asked was, "Is that a good thing, or should they move
00:01:27.600 | somewhere else where she would be able to pay a lower fee?" That's a hard question to answer,
00:01:33.760 | because it involves the actual person, the woman, the investor involved, and what's important to
00:01:39.360 | her. But in my discussion of the question with my listener, we started talking about portfolio
00:01:45.040 | returns, and my listener shared with me that one of the frustrations is that her portfolio is
00:01:49.440 | invested very conservatively, and it's primarily in bonds and fixed income investments. And because
00:01:56.800 | of that, when you take in the substantial 1.7% asset management fee, he felt that she was really
00:02:04.000 | underperforming, and I agreed with him. And we discussed the situation. I discovered that this
00:02:09.120 | woman could live on her income from social security, and she could live on her income from
00:02:14.160 | the pension account. And in that conversation, we discussed the fact that my recommendation would be,
00:02:22.960 | since she's going to leave this money behind for her heirs and beneficiaries as some form of
00:02:28.080 | inheritance, that she should set a financial goal of maximizing her money so that it could
00:02:35.200 | be the biggest pot possible when it's left behind to the people that she wants it to go to.
00:02:41.120 | And I did some math on the show. I did a financial calculation, and I said, "Let's assume that she
00:02:45.760 | has $1 million in today's dollars," and I said, "Let's assume she's going to keep the money
00:02:50.800 | invested for the next 30 years of her lifespan, and let's assume that she makes no further
00:02:56.320 | contributions to the account, but that she doesn't take any distributions from the account."
00:03:00.960 | And I said, "Let's compare what value a good financial advisor could bring to her if that
00:03:08.800 | financial advisor were able to persuade her to go from a portfolio with a lower expected rate
00:03:14.480 | of return to a portfolio of a higher expected rate of return." And so we said, "Assume for a moment
00:03:19.840 | she's in a portfolio that has an expected rate of return of 4%, and she's paying 2% in fees and
00:03:26.640 | expenses, so her net return is 2%." Well, I plugged that 2% number in, and I demonstrated to my
00:03:32.160 | listener that under that scenario, her portfolio value in about 30 years would be $1.8 million
00:03:38.560 | for her heirs. But then I said, "Let's assume that we could move her from a portfolio that would
00:03:47.520 | have an expected rate of return of 4% into a portfolio with an expected rate of return of,
00:03:51.920 | say, 8%, and yet she's also going to still pay 2% of expenses, so her net return would be 6%.
00:04:00.080 | And so the same calculation, $1 million growing over 30 years at 66% per year,
00:04:05.360 | comes out to be $5.7 million." And I explained to the listener, I said, "That would be, if I were
00:04:12.240 | auditioning for the job of her financial advisor, that would be what I would focus on. And then
00:04:16.400 | through good financial planning, I would try to solve her income needs. I would try to educate
00:04:21.200 | her about investments so that she could be competent and knowledgeable enough to feel
00:04:28.880 | comfortable with that portfolio, and I would try to move her into that portfolio that has a higher
00:04:33.040 | expected rate of return so that she could potentially leave behind $5.7 million for
00:04:37.920 | those she wants to leave the money to, rather than $1.8 million." I'm going to stop here and
00:04:42.400 | ask you a question. Thus far in what I have said to you, what's missing? What's missing?
00:04:55.360 | Can you spot what's missing? The answer is, what's missing is, what if she could both solve
00:05:05.680 | her financial planning needs, etc., so that she was comfortable moving to a higher returning
00:05:12.320 | investment, and also eliminate or reduce her financial advice fees to lower the expenses
00:05:21.200 | on her portfolio? Because it's not just option one or option two. She does have more options.
00:05:28.240 | Option one would be she could stay where she is and make a net 2% rate of return,
00:05:32.240 | have $1.8 million. Option two was she could move into a portfolio with a higher expected return,
00:05:38.480 | and thus potentially generating for herself a portfolio of $5.7 million.
00:05:42.800 | But there are many more options. A simple option three would be, what if she could move into that
00:05:50.480 | same portfolio with an expected return of 8%, but let's pretend that she could completely eliminate
00:05:59.360 | financial advisor fees? Because of course she could, if she didn't need the services of a
00:06:03.280 | financial advisor or want the services of a financial advisor, she could completely eliminate
00:06:08.800 | those fees. Now let's run it at 8%. Do you know what the number is on that million dollar portfolio?
00:06:19.840 | The number is $10,062,000. Let's call that $10 million among friends.
00:06:24.960 | So the full and complete analysis of that situation would be that a bad financial advisor
00:06:32.960 | who's keeping her in a low performing portfolio because that financial advisor is bowing to her
00:06:41.600 | conservative tendencies and not educating her on the value of growing this portfolio for her heirs
00:06:47.840 | is potentially costing her the difference between $1.8 and $5.7 million. Let's call that $3 million
00:06:52.640 | among friends. So the bad financial advisor is costing her $3 million. But that doesn't mean
00:07:02.160 | that the financial advisor, if they're still charging her 1.7%, is not also costing her money.
00:07:09.920 | Because the difference between a 6% return and an 8% return is an additional $5 million.
00:07:18.160 | Now question, when I was going over that Q&A call yesterday, did you hear that omission?
00:07:27.520 | Did you think about that omission? Were you aware that there were more alternatives?
00:07:36.880 | Most people, the answer is no. So let me give you a tool that I think is very useful,
00:07:42.480 | that I use all the time, to try to smoke out some of these answers when you are consulting
00:07:49.920 | with people. Here it is, it's a simple question.
00:07:53.600 | After listening to me and understanding a little bit about my situation,
00:08:00.560 | is there anything that you think I should ask that I haven't asked you yet?
00:08:07.120 | Are there any questions that you think I should be asking that you think would be helpful to me?
00:08:12.160 | Is there any information that I haven't considered that you think I should be considering?
00:08:17.520 | Those are all variations on the same theme. But put your advisor in the context
00:08:25.600 | of answering that question and give them a chance to tell you,
00:08:31.840 | "Well, based upon my professional experience, what you should be asking is this."
00:08:36.240 | Is that question going to solve all your problems and make sure that you're always getting full
00:08:41.520 | and comprehensive advice? Of course not. But a lot of times an advisor, a professional advisor,
00:08:47.760 | will know about things that you don't know about. But the advisor knows that most people
00:08:56.080 | aren't interested and so they keep their mouth shut. It's not necessarily out of malice,
00:09:00.640 | certainly I'm sure that some percentage of the population is filled with crooks and thieves who
00:09:07.600 | are omitting information out of malice. Certainly, there are many times that psychological tactics
00:09:13.600 | and tools are used and the omission of information is part of an intentional plan to rip people off.
00:09:18.640 | I believe that. But in my experience, that's just not the case most of the time. Most of the time,
00:09:25.120 | what happens is an advisor learns that most people don't actually care about a full and
00:09:31.680 | complete answer. And so they just learn to answer the question that's asked and not to offer more
00:09:38.960 | reasons, especially if they're dealing with a customer. If I'm selling Toyotas,
00:09:45.840 | do I have any reason to try to talk up all of the benefits of a Chevrolet?
00:09:52.160 | Is that my duty? I don't think it is usually. And so if I were selling Toyotas, usually I would say,
00:10:00.240 | "Here's what makes a Toyota great." And I would just focus on that. I wouldn't talk down about
00:10:06.080 | a Chevrolet, but it's not my job to go and present all of the potential alternatives to you.
00:10:10.240 | But if you were to ask me, as a Toyota salesman, something along the lines of,
00:10:15.280 | "You know, after our conversations, is there anything that you think is important to me?"
00:10:19.520 | "Is there anything that you think I should be considering that I haven't considered?"
00:10:23.840 | That gives me a chance very easily to say, "You know, you mentioned to me that you have this
00:10:29.760 | particular need, and I think you should seriously consider this. The Toyota is really good in this,
00:10:33.840 | but I'll tell you what, Chevrolet has this particular car that has this certain benefit.
00:10:37.760 | I think you should consider it." A question like that gives honest people a chance
00:10:43.040 | to give you more information. And you can use this to your benefit.
00:10:47.760 | I hope you'll try it out, and I hope it will use it. I hope it will help you to get better value
00:10:55.200 | from the people that you're interacting with. So in summary, thing number one, always look for
00:11:00.960 | additional opportunities. Now you can't do this to an endless degree. At some point in time,
00:11:06.000 | you've got to make a decision. But if you're trying to decide between option one and option two,
00:11:11.280 | ask yourself this question, "What other options am I not considering? What other things am I not
00:11:17.920 | considering? What's my alternative choice of action?" And just try to brainstorm about other
00:11:22.800 | ways that you might be able to accomplish your goals. Because there probably are other ways,
00:11:27.840 | but you might not be looking at them, you might not be thinking about them, and you probably don't
00:11:31.680 | know what you don't know. In order to overcome that gap, you're going to need the advice of an
00:11:36.320 | expert. But you have to learn how to get information out of an expert. And one of the most
00:11:41.600 | useful questions that I have developed to get information out of an expert is to ask an open
00:11:48.160 | ended pointed question, such as, "If you were in my shoes, what questions would you be asking
00:11:55.920 | that I've neglected?" Or, "What questions would you be asking because you know more than I do?
00:12:02.320 | What should I be asking that I haven't asked you about? What do I not know to ask about?"
00:12:07.440 | And it's my hope that asking that question will help you to smoke out some additional alternatives
00:12:15.280 | that might also serve you. At the end of the day, you've got to decide. You've got to collect
00:12:20.560 | options, and you've got to choose. And you're never going to make a perfect choice. There is
00:12:24.720 | no such thing as a perfect choice. But you want to make a good choice. And so fully consider
00:12:30.480 | as many alternatives as you can and try to get experts working for you effectively.
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